Reserve Bank of India’s monetary policy committee on Friday lowered the repo rate by 0.75% to 4.4%, supplementing it by measures to enhance the flow of cheap credit along with a three month moratorium on repayment of long duration loans. The far-reaching package aims to combat the economic fallout of the Covid-19 outbreak. The sense of urgency in RBI’s response showed up when it opted to advance its scheduled MPC meeting by a week to announce these measures. In terms of intent, the central bank has signalled it will pull out all stops to combat an unprecedented crisis.
The highlight of this package is that RBI has chosen to prioritise financial stability. A lockdown, which effectively brings economic activity to a shuddering halt, will ripple out into the financial system. Even sound firms will struggle to meet payments and this will rattle an already fragile financial sector. In this context the moratorium on repayments, including on home loans, will provide space for the system to recover.
The steps to boost the flow of credit will act as a force multiplier to an interest rate cut. These steps have created a potential extra liquidity of Rs 3.74 lakh crore, with a big chunk earmarked towards bank investment in high quality corporate debt. Over the last two months RBI’s liquidity injection comes to about 3.2% of GDP. Now, government needs to back this with a fiscal response.
This piece appeared as an editorial opinion in the print edition of The Times of India.